IFRS 12 para 7, significant judgement, court appeal against Consob de facto control position, additional unaudited information

Vivendi S.A. – Annual report – 31 December 2017

Industry: film and television

2.2 Telecom Italia

On December 15, 2015, Telecom Italia’s Extraordinary Shareholders’ Meeting appointed four members to Telecom Italia’s Board of Directors who were proposed by Vivendi, including three representatives of Vivendi and one independent member, bringing the total number of members of Telecom Italia’s Board of Directors to 16, including nine independent members. At this Shareholders’ Meeting, Vivendi held 2,772 million Telecom Italia ordinary shares with voting rights, i.e., 20.5% of the ordinary shares, representing 14.2% of the total share capital, and, given the quorum present at this meeting, Vivendi’s interest represented approximately 36% of the votes cast during this meeting. At Telecom Italia’s Ordinary Shareholders’ Meeting held on May 25, 2016, Vivendi held 3,331 million Telecom Italia ordinary shares with voting rights, i.e., 24.7% of the ordinary shares, representing 17.1% of the total share capital, and, given the quorum present at this meeting, Vivendi’s interest represented approximately 40% of the votes cast during this meeting. In addition, on April 27, 2016, Mr. Arnaud de Puyfontaine, Chairman of Vivendi’s Management Board, was appointed Deputy Chairman of Telecom Italia’s Board of Directors.

On May 4, 2017, Telecom Italia’s Ordinary Shareholders’ Meeting appointed, out of the newly constituted 15-member Board of Directors, the ten members who were included in the slate submitted by Vivendi, i.e., (i) five non-independent members, including Mr. Giuseppe Recchi, Executive Chairman of the Board of Directors, and Mr. Flavio Cattaneo, Amministratore delegato, as well as three representatives of Vivendi, including Mr. Arnaud de Puyfontaine, Chairman of Vivendi’s Management Board and Deputy Chairman of Telecom Italia’s Board of Directors and (ii) five independent members (among the ten directors who are deemed independent within the meaning of Italian law and the Corporate Governance Code for listed companies). At this Shareholders’ Meeting, Vivendi held 3,640.1 million ordinary shares with voting rights, i.e., 23.9% of the ordinary shares, representing 17.2% of Telecom Italia’s total share capital, and, given the quorum present at this meeting, Vivendi’s interest represented approximately 41% of the votes cast during this meeting.

On June 1, 2017, Mr. Arnaud de Puyfontaine was appointed Executive Chairman of Telecom Italia’s Board of Directors. Concomitantly, Mr. Giuseppe Recchi was appointed Deputy Chairman of Telecom Italia’s Board of Directors and Mr. Flavio Cattaneo was confirmed as Amministratore delegato. As such, in accordance with Italian regulations and the company’s bylaws, Mr. Flavio Cattaneo was, until his departure from the company, responsible for Telecom Italia’s financial and operational management, including mainly the development and implementation of the strategic, industrial and financial plan (after review by the company’s Board of Directors), as well as the organization of Telecom Italia’s businesses in Italy and South America. In his capacity as Executive Chairman of the Board of Directors, Mr. Arnaud de Puyfontaine was given responsibility for the supervision and coordination of the work of the Board of Directors, notably including:

  • in coordination with the Amministratore delegato, identification of the guidelines of the group’s development plan; advice and supervision as part of (i) the development and implementation of the strategic, industrial and financial plan and (ii) the organization of businesses and monitoring of Telecom Italia’s economic and financial performance;
  • representation of Telecom Italia in its external relations with regulators, Italian and international institutions, as well as investors; and
  • supervision of brand and media strategy, institutional communication, legal and public affairs, as well as value creation.

In addition, Vivendi has not entered into any agreement with other shareholders of Telecom Italia and does not hold any potential voting rights in Telecom Italia. In particular, Vivendi is not acting in concert with any third party and has not entered into a temporary sale agreement concerning Telecom Italia shares or voting rights. Moreover, Vivendi neither holds instruments nor is a party to agreements which could enable it to obtain Telecom Italia shares or voting rights.

Moreover, Vivendi does not have the power to unilaterally appoint the Executive Chairman of Telecom Italia’s Board of Directors or the Amministratore delegato and no agreements exist between Vivendi and Telecom Italia that would enable Vivendi to appoint the majority of the members to Telecom Italia’s Board of Directors or to obtain the majority of votes at meetings of Telecom Italia’s Board of Directors.

On July 24, 2017, Telecom Italia’s Board of Directors and Mr. Flavio Cattaneo mutually agreed on his departure as Amministratore delegato of the company.

On July 27, 2017, Telecom Italia’s Board of Directors:

  • temporarily granted the powers held by Mr. Flavio Cattaneo (resigned Amministratore delegato) to Mr. Arnaud de Puyfontaine (Executive Chairman of the Board of Directors), except for those powers related to Italian national security matters and the subsidiary Telecom Italia Sparkle, which powers were temporarily granted to Mr. Giuseppe Recchi, Deputy Chairman of the Board of Directors; and
  • acknowledged the commencement of the exercise by Vivendi of “management and coordination activities” (attività di direzione e coordinamento) of Telecom Italia, within the meaning of Article 2497-bis of the Italian Civil Code.

On July 28, 2017, Mr. Amos Genish was appointed Direttore Operativo (General Manager for operations) of Telecom Italia, overseeing all of Telecom Italia’s operations.

On September 13, 2017, Vivendi took note of the position expressed by the Consob that Vivendi exercises de facto control over Telecom Italia, under Article 93 of the Consolidated Law on Finance and Article 2359 of the Italian Civil Code. Vivendi formally contests this interpretation and has appealed before the competent courts.

On September 28, 2017, Mr. Amos Genish was appointed Amministratore delegato of Telecom Italia.

On the same day, as part of the investigation launched by the Italian Government into whether certain provisions of Law Decree No. 21 of March 15, 2012, on special powers of the Italian Government relative to the defense and national security sectors and to activities of strategic importance in the fields of energy, transport and communications, had been complied with by Telecom Italia and Vivendi, the Italian Government found that the notification made by Vivendi as a precautionary measure under Article 1 of the aforementioned legislative decree was made late, without consequences for Vivendi. In addition, a procedure was launched against Telecom Italia for failing to make the required notification under Article 2 of the same legislative decree.

By a decree dated October 16, 2017, the Italian Government decided to exercise the special powers laid down in Article 1 of the 2012 legislative decree, relative to the defense and national security sectors. This decree imposes a number of organizational and governance measures on Vivendi and Telecom Italia and its two subsidiaries, Telecom Italia Sparkle Spa (“Sparkle”) and Telsy Elettronica e Telecomunicazioni Spa (“Telsy”). In particular, Telecom Italia, Sparkle and Telsy must have a division in charge of supervising all activities related to defense and national security, which is fully autonomous and endowed with human and financial resources sufficient to guarantee its independence, and to appoint to their governing bodies a member who is an Italian citizen, who is approved by the Italian Government and who has security clearance. It also requires the establishment of a supervisory committee under the auspices of the Council of Ministers (Comitato di monitoraggio), to monitor compliance with these obligations.

In addition, by a decree dated November 2, 2017, the Italian Government decided to implement the special powers conferred by Article 2 of the 2012 legislative decree, relative to the fields of energy, transport and communications. This decree imposes on Telecom Italia the obligation to implement development, investment and maintenance plans for its networks in order to guarantee their operation and security, to provide universal service, and, more generally, to satisfy public interest in the medium and long term, under the control of the Comitato di monitoraggio, who must be notified of any reorganization of the Telecom Italia group’s holdings or any project having an impact on the security, availability and operation of the networks.

Based on the foregoing, Vivendi considers that it does not have the power to unilaterally direct the relevant activities of Telecom Italia, according to IFRS 10. Vivendi considers that it has the power to participate in Telecom Italia’s financial and operating policy decisions, according to IAS 28, and, consequently, it is deemed to exercise a significant influence over Telecom Italia. Since December 15, 2015 and as of December 31, 2017, Vivendi’s interest in Telecom Italia has been accounted for under the equity method.

IV- Unaudited supplementary financial data: Vivendi’s interest in Telecom Italia

Preliminary comment:

This section does not form an integral part of the Audited Consolidated Financial Statements for the year ended December 31, 2017. It was approved by Vivendi’s Management Board on February 12, 2018. This section provides supplementary information to IFRS regulatory information set out in the following Notes to the Audited Consolidated Financial Statements for the year ended December 31, 2017:

  • Note 2 « Major events », which describes the equity accounting of Telecom Italia;
  • Note 11 « Investments in equity affiliates », which includes the information required by IAS 28 – Investments in Associates and Joint Ventures; and
  • Note 21 « Related parties ». 

Vivendi’s interest in Telecom Italia

Vivendi holds 23.94% of Telecom Italia’s voting rights and 17.15% of its share capital. Since December 15, 2015, Vivendi’s interest in Telecom Italia has been accounted for under the equity method, given that Vivendi considers that it has the power to participate in Telecom Italia’s financial and operating policy decisions, according to IAS 28, and, consequently, it is deemed to exercise a significant influence over Telecom Italia. To this date, Vivendi considers that it does not have the power to unilaterally direct the relevant activities of Telecom Italia, according to IFRS 10, and therefore considers that it does not exercise de facto control over Telecom Italia. For a detailed description of the change in Vivendi’s interest in Telecom Italia please refer to Note 2.2 to the Consolidated Financial Statements for the year ended December 31, 2017.

Should Vivendi’s position with regard to Telecom Italia’s share capital evolve and if Vivendi were to take control of Telecom Italia, Vivendi would, if applicable, fully consolidate Telecom Italia in its Consolidated Financial Statements notably, with the consequences described below.

Impacts on the Statement of Earnings, the Statement of Financial Position and the Statement of Financial Net Debt

The following are provided below for illustrative purposes: cumulative Statement of Earnings for the first nine months of 2017 and for the year ended December 31, 2016, prepared based on the financial information published by Telecom Italia, as well as a cumulative Statement of Financial Position and a cumulative Statement of Financial Net Debt, prepared based on the latest financial information published by Vivendi and Telecom Italia, i.e., Vivendi’s Statement of Financial Position as of December 31, 2017, and Telecom Italia’s Statement of Financial Position as of September 30, 2017. It should be noted that Telecom Italia may have definitions and calculations for these non-GAAP measures (EBITDA, Income from operations, EBITA) that differ from those used by Vivendi. Thus, these measures may not be homogeneous.

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Impacts on Vivendi’s financial covenants and credit ratings

Vivendi and Telecom Italia are two autonomous groups that operate in a strictly separate financial way. Vivendi’s non-controlling interest in Telecom Italia does not create any financial relationship or give Vivendi any special rights over Telecom Italia’s financial position. Thus, Vivendi does not have access to Telecom Italia’s cash, via a shareholders’ current account or by any other means that would allow Telecom Italia’s cash flow to be transferred to Vivendi. More generally, Telecom Italia’s financial activities are conducted independently of those of Vivendi, in particular with respect to any matters concerning its financing: issuance of bonds, establishment of bank credit facilities, hedging instruments. In addition, Telecom Italia has not received nor does it receive any direct or indirect financial support from Vivendi. As of February 12, 2018 (the date of Vivendi’s Management Board meeting that approved the Consolidated Financial Statements for the year ended December 31, 2017), none of Telecom Italia’s bonds or bank credit facilities, nor any of its other financial or commercial commitments, are guaranteed or supported in any manner whatsoever by Vivendi or any of its subsidiaries.

Vivendi has a €2 billion bank credit facility, undrawn as of the date of this report, and, at the end of each half-year, Vivendi is required to comply with a Proportionate Financial Net Debt to EBITDA financial covenant over a 12-month rolling period not exceeding 3 for the duration of the loan (the assumptions and methods to calculate the ratio are presented in Note 19.3 to the Consolidated Financial Statements for the year ended December 31, 2017). Non-compliance with this covenant could result in the early redemption of the bank credit facility if it were drawn, or its cancellation. As of December 31, 2017, Vivendi was in compliance with this financial covenant. If Vivendi were to take control of Telecom Italia, the financial covenant would be calculated based on the consolidated figures of the new combined entity and Vivendi may wish to either get Telecom Italia excluded from the calculation of this ratio given the strict financial separation of the two groups, or renegotiate the level of this ratio with its banking pool.

In addition, taking into account its bonds (€21.94 billion as of September 30, 2017), Telecom Italia will continue to keep a credit rating separate from that of Vivendi. As a reminder, Vivendi’s current credit ratings are BBB Stable (Standard & Poor’s) / Baa2 Stable (Moody’s); Telecom Italia’s current credit ratings are BB+ Positive (Standard & Poor’s) / Ba1 Stable (Moody’s) / BBB- Stable (Fitch Ratings). More generally, Vivendi considers that the quality of its credit should not be impacted by a possible consolidation of Telecom Italia given the financial separation of the two groups and provided that this analysis is confirmed by the rating agencies.

Change-of-control clauses at Telecom Italia

If Vivendi were to take control of Telecom Italia, change-of-control clauses could be activated at Telecom Italia and could, if applicable, result in the early redemption of certain of Telecom Italia’s bonds and bank credit facilities. In this respect, the only information available to Vivendi is the financial information published by Telecom Italia.

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